Smart Strategies for Extending Medium-Duty Truck Replacement Cycles

Economic uncertainty, the sticker shock of new vehicles equipped with 2010 EPA emissions controls, and tighter budgets have caused a growing number of fleet managers to push out replacement cycles, especially for their big-ticket, medium-duty trucks.

"What we're seeing is that customers are trying to run their vehicles a little bit longer," said Steve Jastrow, strategic consulting services manager, GE Capital Fleet Services. "People are still in a wait-and-see mode right now to see what happens with the economy."

Erik Nelson, truck sales manager, North America, Wheels Inc., agreed. "In the past couple of years, we have seen Class 4-7 medium-duty work trucks trending toward longer replacement cycles, mostly due to cost concerns associated with purchasing new equipment. If a company's profits are lower, that frequently drives budget cuts, thus, resulting in less capital available for new truck purchases, even if those trucks are leased."

The challenge, however, is that keeping trucks in service longer than planned is not a slam-dunk, cost-savings strategy. It's an approach fraught with risks, such as high-ticket engine and transmission repairs, costly downtime, and employee morale issues, to name a few, especially if done haphazardly without a plan to guide the process.

If a company chooses to extend medium-duty truck replacement cycles, how should the fleet manager go about doing it in a way that mitigates the risks - and achieves tangible cost savings?

Understanding Work Truck Replacement Cycles

The best starting point is defining exactly what an optimal replacement cycle means, particularly with medium-duty (Class 4-7) trucks. So, what is the optimal truck replacement cycle? 

 "There are a number of factors that dictate our recommendations," said Nelson of Wheels. "However, Wheels typically looks at the B-10 life (the length of time between production and the point at which 10 percent of a given product population will fail) of the chassis drivetrain. Our goal is to structure the lease of the vehicle to coincide with the replacement of that vehicle sufficiently before it reaches its B-10 lifecycle prediction. In service fleets, operating medium-duty truck Classes 4-7, these engines are typically reaching their B-10 life at 250,000 to the low 300,000 miles. We want to get the client's vehicle to market before this threshold, so many of our medium-duty units are replaced in the 60- to 84-month time frame."

Fleets almost have to look at it on a unit-by-unit basis.

"Factors such as cost of a vehicle, cost of upfit, potential downtime, depreciation, idle time (low or high), and so forth. We'll plot those costs out on a curve and the optimal replacement time is sort of at the belly of that curve. That could mean 120,000-125,000 miles for a Class 4 pickup with very little upfit on it or a quarter-million miles on it if it is a truck with a fairly specific upfit, with low mileage, and low idle time. So there's really no specific rule of thumb we go by. It all depends on how the truck is used," explained Jastrow of GE Capital Fleet.

Rob Kooken, director, business development, PHH Arval, agreed.

"The factors that influence lifecycle are the type of engine (such as gas versus diesel), annual utilization by miles or hours, and cost of upfitting or specialized equipment," said Kooken. "Typically, urban delivery and long-haul vehicles have shorter replacement cycles (five to eight years) than low-mileage, specialized, or expensive upfitted vehicles, which fleets tend to keep longer."

Assessing Risks of Longer Replacement Cycles

If fleet managers consider extending vehicle life beyond the truck's optimal cycle, what risks should they consider beforehand?

"The biggest risk is not accommodating increased maintenance costs due to more preventive maintenance than originally anticipated and/or the truck encountering more frequent repairs," said Nelson of Wheels. "It's not the $1,000 to $2,000 that it costs for the repair so much as it is the downtime of that truck, especially when there is no replacement or backup unit available because of budget constraints that are driving the extended replacement cycle in the first place. In some cases, a rental truck can be secured in the short term to bridge the repair period, however, this adds significant costs as well. With several trucks designed to perform a specific task, a rental truck may not be available to perform the same work as that of that broken truck."

What's the cost of downtime?

"We have had telematics and energy clients tell us it runs as high as in the thousands of dollars per hour for one of their trucks being down for unexpected reasons. Basically, if you extend replacement cycles you need to also plan for the unexpected repair," cautioned Nelson.

Jastrow of GE Capital puts the risk of unexpected downtime this way: "There are direct costs such as lost revenue and penalties or fees on missed appointments, towing charges, temporary rentals, overtime and also indirect costs such as lower employee morale that need to factor in your risk analysis."

Ken Gillies, truck operations manager at GE Capital, warns about the potential impact on employee morale if vehicles are kept too long. "Not only is the service of the truck affected but it also affects the operator," said Gillies. "If employees aren't feeling good about the equipment they're using or if the vehicle is unreliable, that is going to start to have a negative effect on productivity and morale - and that may mean the driver lets their guard down a bit in caring for their vehicle. This, in turn, creates a snowball effect, which can drive up repair costs."

Chris Foster, manager, vehicle acquisitions for Automotive Resources International (ARI), advises fleet managers to consider their budgets for future vehicle replacements. "Each year a fleet manager does not replace vehicles, a hole is being dug in the budget," said Foster. "If you originally budgeted $5 million in replacements but put them off because your budget has been cut to $3 million, the next year, you could have close to $10 million in replacements due with likely far less money for the purchases."

Mitigating Risks With Smart Strategies

What can fleet managers do to extend replacement cycles, in a smart way that addresses these risks and enables companies to weather budget challenges? 

Route optimization and idle time management.

"The vehicle replacement cycle is typically driven by mileage. So if you can lower miles by optimizing the routes, that can help with extending life of the vehicle," said Jastrow of GE Capital. "Then manage idle time. It doesn't show up on the odometer. But idle time really is the mileage on the engine. You may want to develop a policy on that. Or you have a telematics tool to help manage idle time and route optimization - those are a few ways to get a little more out of your vehicles."

Vehicle history analysis.

"I urge fleets to look at the service history of their vehicles, especially if they can do it on a unit-by-unit level - to see what the life of that truck has been like so far," advised Gillies of GE Capital. "In other words, have there been unscheduled maintenance items that have cropped up multiple times that should have already raised a flag of concern? Perhaps the vehicle is being used in the wrong application or there's something negative occurring with the vehicle or that particular make and model. You want to know whether the truck has had proper preventive maintenance, otherwise, its life capabilities on the backend are going to be affected. This involves a lot of time-consuming analysis, but it helps you determine the feasibility of extending a particular vehicle's service life."

Limiting vehicle duty cycle.

"It is important to not allow the truck to continue operating at the same level as prior to the extension because the wear on the vehicle and associated costs will accelerate as it ages," said Foster of ARI. "By reducing the impact and keeping up with maintenance, operating costs will be kept in check."

Shifting vehicle assignment.

What about moving high-mileage trucks to a lower-mileage application? Is this a viable strategy for extending vehicle life?

"It can be," said Gillies. "The challenge here is that the driver who receives the older vehicle is usually not going to be happy, which can create negative effects."

Proactive communication.

How can fleet managers overcome driver acceptance issues when keeping older vehicles in service?

"Be up-front with your communication so that the driver understands that, yes, the truck probably should have been replaced sooner, but due to market conditions, the company is having to push out the replacement cycle for a few months or however long it may be," advised Gillies. "So ask for the driver's help in properly taking care of the vehicle and offer expectations as to when [drivers] can expect a replacement."

Driver training.

"When you're considering an extended replacement cycle, it might not be a bad idea to revisit training on the proper and optimal use of the truck so that there isn't any overuse or overloading of the equipment," Gillies recommended. "Work on driver habits to better manage fuel consumption to help with overall cost until you get the replacement unit. This way the driver comes away with a better understanding of how to take care of the vehicle to promote longer life of the vehicle and equipment."

Extended warranties.

Can an extended warranty support a strategy for longer replacement cycles?

"It can. However, by the time you're in the position that you realize you need to extend the life of the vehicle, you're beyond the point of being able to purchase anything," said Gillies. "On the front end, to purchase extended warranty coverage that is going to take one out beyond, say, five years, whatever the mileage parameter is, is getting quite expensive. You have to look at the total cost of ownership perspective to see if it makes financial sense."

Nelson of Wheels recommends fleet managers consider extended warranties at the time of vehicle purchase as "insurance" in case they need to extend the replacement cycle for the vehicle down the road. "The majority of medium-duty trucks we quote have some form of extended powertrain coverage beyond the base factory warranty, which gives the client some leeway at the end of the cycle to feel confident that the truck is still not beyond its expected service life and will continue to perform well," he explained.

The Bottom Line

"This may sound obvious, but doing all the preventive maintenance items (oil changes, fluid levels, checking air pressure, etc.) on time can have a huge impact on the life of your vehicle. This will help keep unexpected repairs to a minimum, downtime in check, improve fuel economy, and give you the option to extend the life of the vehicle," said Jastrow of GE Capital.